A Savings Incentive Match Plan for Employees (SIMPLE) IRA is one of the easiest and least expensive small-business employee retirement plans to set up and run. Among its benefits is a tax credit of up to $500 per year for the first three years, and no annual government reporting requirements. However, there are employer contribution rules and mandatory disclosure guidelines that every SIMPLE IRA must follow.
Every employer must make either matching or nonelective contributions to their eligible employee's SIMPLE IRA retirement accounts. However, the choice about which option to use can change from year-to-year.The options for employer contributions are:
- A dollar-for-dollar match of up to 3 percent of the employee's gross wages -- but only for eligible employees who choose to participate in the plan
- A nonelective contribution, where all eligible employees receive 2 percent of their gross wages even if they do not also contribute
With regard to eligibility, you can choose to include all employees, or only those who received at least $5,000 in wages during any two previous years and who expect to receive at least $5,000 during the current calendar year.
Two annual disclosures are required before the start of each election period, which for most businesses means before November 2 of each year. These disclosures provide information about how the plan operates and inform participants about any upcoming changes to the plan's structure or operation.
The first disclosure is a plain-language summary that outlines participant's rights and responsibilities and describes the features of the plan. Most employers satisfy this requirement by distributing two documents provided by the financial institution who serves as the plan's trustee. These are:
- Guidelines for withdrawals and transfers
- The most current Internal Revenue Service Form 5304-SIMPLE if employees are allowed to select the financial institution when they enroll
- The most current IRS 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be initially deposited with a financial institution of your choosing
The second disclosure is an annual election notice, which focuses on employee and employer contributions. The disclosure must inform employees about:
- Their right to make or change salary contributions
- Your decision to make either matching contributions or non-elective contributions in the coming year
- The election notice also must inform participants about their right to select a financial institution of their own choosing to serve as the trustee or to transfer the plan without cost or penalty if you are using a designated financial institution